The Economy under Democratic Stress
After trouncing Keiko Fujimori by the narrowest of second-round wins, Pedro Pablo Kuczynski will be sworn in as president on July 28th, for a single five-year term. Kuczynski won by just 0.2%, or about 41,000 votes. His triumph over Fujimori, who won twice as many votes as Kuczynski in the first round, was due to massive anti-Fujimori sentiment, which included Veronika Mendoza’s leftist Frente Amplio urging its supporters to stop the return of fujimorismo at all costs.
Though Fujimori’s Fuerza Popular will dominate in the new Congress, with 73 of the 130 seats, to Kuczynski’s party’s inconsequential 18, Congress is unlikely to categorically obstruct the president’s initiatives. Fujimori will likely want to be seen as supporting the president on many initiatives perceived as having wide popular support, such as anti-crime and corruption measures. Too, the Constitution empowers the president to dissolve Congress if a Cabinet is twice censured or denied a confidence vote.
Kuczynski’s program includes several tax cuts, especially in the VAT. Each 1 pp of VAT could equal 0.5% of GDP – so his plan for a 3-point cut over three years could threaten intentions to rein in a prudent fiscal stance. We don’t expect the full cut to happen, but even the 1 pp cut could damage fiscal results. Other proposals, such as shifting to a flat income tax rate for most medium and small firms, could also hit revenues, according to one estimate by more than 1% of GDP. A tax evasion clampdown would be necessary, for such initiatives to make sense. An IMF mission to Peru has stressed the importance of a gradual fiscal consolidation to begin in 2017, and both Moody’s and Fitch have expressed concerns about Kuczynski’s plan.
April growth at 2.5% y/y disappointed most analysts (our expectation was for 3.1%, and the consensus for 3.6%). This result was battered by worse-than-expected performance of primary manufacturing. Non-primary manufacturing grew by 3.3% (more working days), continuing its moderate recovery.
Brexit had only a minor effect on Peru. The sol fell by 1.1% on June 24th – much less than currencies in Peru’s peer countries, and across emerging markets. It then rebounded, and stocks also recovered. Barring a notable global downturn, the effects on Peru should be very limited. Peru exports just 1% of its output to the UK; it could even see a benefit, in a rise in the price of precious metals, of which Peru is an important producer. Brexit will likely also delay any Fed hike.
Now read on...
Register to sample a report